Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2003
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File Number 0-19019
---------------------------------------------------------
PRIMEDEX HEALTH SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
New York 13-3326724
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1510 Cotner Avenue Los Angeles, California 90025
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 478-7808
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
n/a
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 and 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
JULY 31, OCTOBER 31,
-------- -----------
2003 2002
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 58,000 $ 36,000
Accounts receivable, net 26,715,000 29,453,000
Unbilled receivables and other receivables 5,000 1,451,000
Deferred income taxes -- 2,100,000
Other 2,670,000 1,518,000
-------------- --------------
Total current assets 29,448,000 34,558,000
-------------- --------------
PROPERTY AND EQUIPMENT, NET 85,361,000 87,875,000
-------------- --------------
OTHER ASSETS:
Accounts receivable, net 2,167,000 2,366,000
Goodwill, net 23,064,000 23,064,000
Deferred income taxes 5,235,000 3,135,000
Other 543,000 641,000
-------------- --------------
Total other assets 31,009,000 29,206,000
-------------- --------------
$ 145,818,000 $ 151,639,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash disbursements in transit $ 4,643,000 $ 4,613,000
Accounts payable and accrued expenses 22,863,000 20,871,000
Subordinated debentures payable 16,215,000 16,291,000
Notes payable to related party 1,064,000 1,173,000
Current portion of notes and leases payable 41,538,000 36,278,000
-------------- --------------
Total current liabilities 86,323,000 79,226,000
-------------- --------------
LONG-TERM LIABILITIES:
Notes payable to related party 100,000 105,000
Notes and leases payable, net of current portion 111,189,000 121,031,000
Accrued expenses 561,000 694,000
-------------- --------------
Total long-term liabilities 111,850,000 121,830,000
-------------- --------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 568,000 1,504,000
-------------- --------------
STOCKHOLDERS' DEFICIT (52,923,000) (50,921,000)
-------------- --------------
$ 145,818,000 $ 151,639,000
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------- --------
2003 2002 2003 2002
----- ---- ----- ----
REVENUE
Revenue $ 108,478,000 $ 98,438,000 $ 313,215,000 $ 274,275,000
Less: Allowances 72,137,000 62,858,000 205,244,000 172,532,000
-------------- -------------- -------------- --------------
Net revenue 36,341,000 35,580,000 107,971,000 101,743,000
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Operating expenses 26,411,000 29,361,000 79,500,000 76,782,000
Depreciation and amortization 4,214,000 4,066,000 12,765,000 11,191,000
Provision for bad debts 2,163,000 2,338,000 6,152,000 4,885,000
(Gain) loss on sale of interest
in center or equipment 1,000 217,000 (2,952,000) 300,000
-------------- -------------- -------------- --------------
Total operating expenses 32,789,000 35,982,000 95,465,000 93,158,000
-------------- -------------- -------------- --------------
Income (loss) from operations 3,552,000 (402,000) 12,506,000 8,585,000
-------------- -------------- -------------- --------------
OTHER EXPENSE
Interest expense, net (4,466,000) (4,341,000) (13,644,000) (12,126,000)
Other (expense) income, net 114,000 (233,000) (678,000) 394,000
-------------- -------------- -------------- --------------
Total other expense (4,352,000) (4,574,000) (14,322,000) (11,732,000)
-------------- -------------- -------------- --------------
LOSS BEFORE
MINORITY INTEREST (800,000) (4,976,000) (1,816,000) (3,147,000)
-------------- -------------- -------------- --------------
MINORITY INTEREST IN
EARNINGS OF SUBSIDIARY (9,000) (146,000) (288,000) (222,000)
-------------- -------------- -------------- --------------
NET LOSS $ (809,000) $ (5,122,000) $ (2,104,000) $ (3,369,000)
============== ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------- --------
2003 2002 2003 2002
----- ---- ----- ----
BASIC EARNINGS
PER SHARE: $ (.02) $ (.12) $ (.05) $ (.08)
=============== ================= ================ ===============
DILUTED EARNINGS
PER SHARE: $ (.02) $ (.12) $ (.05) $ (.08)
=============== ================= ================ ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 41,102,615 41,001,000 41,085,361 40,832,000
=============== ================= ================ ===============
DILUTED 41,102,615 41,001,000 41,085,361 40,832,000
=============== ================= ================ ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock $.01 par value
100,000,000 shares authorized Treasury Stock, at cost
---------------------- ----------------------- Stock
Paid-in Accumulated Stockholders'
Shares Amount Capital Shares Amount Deficit Deficit
------------ --------- ------------- ----------- ---------- -------------- -------------
BALANCE - OCTOBER 31, 2002 42,830,734 $429,000 $100,328,000 (1,825,000) $(695,000) $(150,983,000) $(50,921,000)
Issuance of common stock 95,000 1,000 28,000 -- -- -- 29,000
Conversion of subordinated debentures 6,079 0 73,000 -- -- -- 73,000
Net loss -- -- -- -- -- (2,104,000) (2,104,000)
------------ --------- ------------- ----------- ---------- -------------- -------------
BALANCE - JULY 31, 2003
(UNAUDITED) 42,931,813 $430,000 $100,429,000 (1,825,000) $(695,000) $(153,087,000) $(52,923,000)
============ ========= ============= =========== ========== ============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JULY 31,
2003 2002
---- ----
NET CASH FROM OPERATING ACTIVITIES $ 15,331,000 $ 9,621,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,493,000) (6,428,000)
Proceeds from sale of imaging centers, property and equipment 1,367,000 1,700,000
Payments from related parties -- 132,000
------------- -------------
Net cash used by investing activities (1,126,000) (4,596,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit 68,000 238,000
Principal payments on notes and leases payable (19,275,000) (14,504,000)
Proceeds from short-term and long-term borrowings 5,427,000 9,572,000
Proceeds from issuance of common stock 28,000 4,000
Purchase of subordinated debentures (3,000) (9,000)
Loan fees (14,000) (15,000)
Payments to related parties (114,000) (171,000)
Joint venture proceeds -- 125,000
Joint venture distribution (300,000) (275,000)
------------- -------------
Net cash used by financing activities (14,183,000) (5,035,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH 22,000 (10,000)
CASH, beginning of period 36,000 40,000
------------- -------------
CASH, end of period $ 58,000 $ 30,000
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12,437,000 $ 10,800,000
------------- -------------
Income taxes $ -- $ 156,000
------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED JULY 31, 2003 AND 2002
- ----------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The
Company entered into capital leases or financed equipment through notes payable
for approximately $7,627,000 and $26,826,000 for the nine months ended July 31,
2003 and 2002, respectively.
During the nine months ended July 31, 2003 and 2002, the Company recorded
imputed interest expense related to notes payable and capital lease deferred
payments and restructuring charges of approximately $1,173,000 and $1,037,000,
respectively.
Effective March 31, 2003, the Company sold its 50% share in Westchester
Imaging Group and recognized a gain on the sale of approximately $2,952,000. As
part of the sale, the Company wrote-off approximately $239,000 in net property
and equipment, $52,000 in other assets, $341,000 in notes and capital leases,
$923,000 in minority interest and $612,000 in accounts payable and accrued
expenses.
During the nine months ended July 31, 2003, the Company wrote-off
approximately $218,000 in other current assets relating to its Tower Heartcheck
operation.
In July 2002, the Company renegotiated twelve of its outstanding notes
payable with DVI Business Credit, obtained $17 million in working capital and
incurred $2.8 million in related debt restructure and finance charges which will
be expensed as interest over the six year life of the loans.
Effective May 1, 2002, the Company acquired the assets and business of
Grove Diagnostic Imaging ["Grove"] in Rancho Cucamonga, California for
approximately $1,454,000 in assumed liabilities. The Company recorded net
property and equipment of approximately $1,441,000 and other current assets of
approximately $13,000 as part of the transaction.
In April 2002, an officer of the Company exercised his option to purchase
300,000 shares of common stock at $.15 per share. As part of the transaction,
the officer gave the Company 30,201 shares of its common stock previously held
by the officer worth $45,000 ($1.49 per share public closing price on the
transaction date). In addition, the officer gave the Company an additional
13,424 shares of common stock previously held by the officer worth $20,000 in
payment of his note payable with accumulated interest (classified as Stock
Subscription Receivable on the Company's financial statements). By combining the
transaction, the Company issued a net 256,375 shares of common stock to the
officer for his option exercise.
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses.
6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENATATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles for
complete financial statements; however, in the opinion of the management of the
Company, all adjustments consisting of normal recurring adjustments necessary
for a fair presentation of financial position, results of operations and cash
flows for the interim periods ended July 31, 2003 and 2002 have been made. The
results of operations for any interim period are not necessarily indicative of
the results for the full year. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes thereto contained in the Company's Annual Report on Form 10-K for
the year ended October 31, 2002.
The consolidated financial statements include the accounts of Primedex
Health Systems, Inc., and its subsidiaries outlined as follows:
a) Radnet Management, Inc. ["Radnet"]
Subsidiaries
(a) Radnet Sub, Inc. ["Tower"],
(b) Radnet Heartcheck Management, Inc.,
(c) Radnet Managed Imaging Services, Inc. ["RMIS"],
(d) SoCal MR Site Management, Inc.,
(e) Radnet Management I, Inc.,
(f) Radnet Management II, Inc. ["Modesto"],
(g) Westchester Imaging Group (a 50% joint venture),
(h) Burbank Advanced Imaging Center, LLC (75%),
(i) Rancho Bernardo Advanced Imaging Center, LLC (75%)
b) Diagnostic Imaging Services, Inc. ["DIS"]
Both Radnet and DIS are combined with Beverly Radiology Medical Group
III ["BRMG"]
Operating activities of subsidiary entities are included in the
accompanying financial statements from the date of acquisition. All intercompany
transactions and balances have been eliminated in consolidation and
combinations. Due to low volume, Radnet Heartcheck Management, Inc. ceased doing
business in early fiscal 2003. Westchester Imaging Group ("WIG") was
consolidated with the Company based upon the criteria of EITF 97-2 insofar as
the Company had a controlling financial interest in WIG through a contractual
management arrangement. The Company's share of Westchester Imaging Group was
sold on March 31, 2003.
Medical services and supervision at most of the Company's imaging centers
are provided through BRMG and through other independent physicians and physician
groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly
Radiology Medical Group, both of which are 99% owned by a shareholder and
president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
NOTE 2 - NATURE OF BUSINESS
Primedex Health Systems, Inc., incorporated on October 21, 1985, provides
diagnostic imaging services through its 55 facilities. The Company arranges for
the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound,
mammography, nuclear medicine and general diagnostic radiology to the public.
7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147 ("Acquisitions of
Certain Financial Institutions--an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9"), No. 146 ("Accounting for Costs Associated with
Exit or Disposal Activities") and No. 145, ("Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002"). SFAS No.
147 is effective for acquisitions after October 1, 2002. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
SFAS No. 145 is effective for financial statements issued after May 15, 2002.
The adoption of SFAS 145, SFAS 146, and SFAS 147 did not have a material impact
on the financial statements.
In December 2002, the FASB issued SFAS No. 148 ("Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123"), which amends SFAS No. 123. SFAS No. 148, for which certain provisions are
effective for fiscal years ending after December 15, 2002, provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock based employee compensation and amends certain disclosure
provisions of SFAS No. 123. The adoption of SFAS No. 148 did not have a material
effect on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149 ("Amendment of Statement 133 on
Derivative Instruments and Hedging Activities"). This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement is effective for contracts entered into or modified after June
30, 2003. The Company does not believe SFAS No. 149 will have a material impact
on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150 ("Accounting for certain
financial instruments with characteristics of both liabilities and equity").
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. The Company
believes the adoption of SFAS No. 150 will not have a material impact on the
Company's financial statements.
NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES
Center openings:
Effective December 1, 2002, the Company opened Rancho Bernardo Advanced
Imaging Center, LLC, near San Diego, which provides MRI, CT, ultrasound and
x-ray services. Prior to the opening, the Company invested approximately
$1,050,000 primarily for leasehold improvements and the LLC partners invested
$250,000 cash. The Company used its existing lines of credit for the payment of
leasehold improvements. The equipment was financed by General Electric.
8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES - CONTINUED
Center sales:
Effective March 31, 2003, the Company sold its 50% share of Westchester
Imaging Group for $2,500,000. As part of the transaction, the Company purchased
100% of the accounts receivable generated through March 31, 2003 for $850,000
and reimbursed the joint venture for $283,000, which represented 50% of the
remaining liabilities, resulting in net proceeds of approximately $1,367,000.
The Company recognized a gain on the transaction of approximately $2,952,000.
Net revenue and net income of Westchester for the nine months ended July 31,
2003 was $2,283,000 and $255,000, respectively. Net revenue and net income of
Westchester for the nine months ended July 31, 2002 was $3,820,000 and $328,000,
respectively.
During the third quarter of fiscal 2003, the Company closed its La Habra
facility. During the second quarter of fiscal 2003, the Company closed two of
its satellite x-ray facilities servicing its Riverside and Long Beach (Los
Coyotes) locations, respectively. The closures were cost reduction measures
where volume at these locations could be directed to other nearby facilities
with existing equipment operating below capacity. Due to low volume, Radnet
Heartcheck Management, Inc. ceased doing business in early fiscal 2003.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill is recorded at cost of $29,330,000, less accumulated amortization
of $6,266,000 as of July 31, 2003 and October 31, 2002. Other intangible assets
consist of loan fees which are expected to be fully amortized by December 2003.
Bond offering costs were fully amortized in June 2003.
The Company implemented Statement of Financial Accounting Standards No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective November 1, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) are no longer amortized but are subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. Application of the
nonamortization provisions of the Statement resulted in an increase in income of
approximately $1,090,000 ($0.03 per share) for each of the periods ended July
31, 2003 and 2002.
NOTE 6 - CAPITAL TRANSACTIONS
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses.
Effective December 16, 2002, an officer of the Company exercised his
options to purchase 95,000 shares of common stock at $.30 per share. The officer
paid the Company $28,500 cash. During the nine months ended July 31, 2003, the
Company retired 26,000 options to purchase common stock at a weighted average
price of approximately $.65 per share due to the termination of employees.
The Company issued five-year warrants to three physicians for a combined
250,000 shares of common stock at a weighted average price of approximately $.39
per share upon entering employment agreements with the Company. In addition, the
Company issued two-year warrants to an officer of the Company for 300,000 shares
of common stock at $.19 per share upon extending his note payable with the
Company to July 2005. The Company also retired 30,000 warrants to purchase
common stock at $.79 per share due to the termination of one physician.
9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - CAPITAL TRANSACTIONS - CONTINUED
During the third quarter of fiscal 2003, holders of $73,000 face value
subordinated debentures converted their bonds into 6,079 shares of the Company's
common stock ($12 per share conversion price).
NOTE 7 - RELATED PARTY TRANSACTIONS
The amount due to related parties at October 31, 2002 consisted of
$1,173,000 of short-term notes payable due to an officer of the Company, and
$105,000 of long-term notes payable due to an employee of the Company. Both
notes payable were for the purchase of DIS common stock in 1996. The notes bear
interest at 6.58%. The short-term notes payable interest is paid monthly, and
the long-term note payable interest is paid annually. The Company issued
two-year warrants to an officer of the Company for 300,000 shares of common
stock at $.19 per share upon extending $100,000 of his note payable with the
Company to July 2005. During the nine months ended July 31, 2003, the Company
repaid principal of $114,000 on the short-term note payable.
NOTE 8 - SUBSEQUENT EVENTS
In May 2003, the Company sent out a solicitation requesting current
subordinated debenture holders to extend its term from June 2003 to June 2008.
In consideration for the deferral, the Company will increase the interest from
10% to 11.5% (per annum) paid quarterly beginning with the October 1, 2003
payment. In addition, the Company will reduce the conversion rate from $12.00 to
$2.50 per share for those consenting bondholders. The Company also agreed not to
redeem the bonds prior to June 2005. Of the $16.3 million of outstanding
debentures, the Company received consents from holders of more than $11 million
to the terms. The Company determined that the residual $5.3 million of
outstanding debentures would be too costly to pay and would negatively impact
its future viability. Accordingly, the Company elected to again seek consents
from the holders the same restructuring already approved by over $11 million
with the intent to file that approval with the Bankruptcy Court and seek
confirmation of a plan requiring all debentures, not just those consenting, to
be restructured in accordance with the consent. Having received an approximate
94% in number and 96% in amount approval to the extension program, the Company
has submitted the restructuring for approval and confirmation by the Bankruptcy
Court. The bankruptcy filing should have absolutely no other impact on the
Company other than restructuring of the debentures and should be concluded
before October 31, 2003.
Effective August 1, 2003, the Company will form a new LLC with CTI
Molecular Imaging which will provide PET services at its Tower Roxsan facility.
CTI will provide the equipment and the Company will provide the facility,
physician, employees and supplies necessary to provide the services. Roxsan
currently has sufficient space to house the PET so the Company will only need to
provide the variable expenditures necessary.
Effective August 27, 2003, an officer loaned the Company $1,000,000 which
was used to reduce its outstanding credit facility with GE Asset Management. The
short-term note bears interest at 8% and is due on demand.
Subsequent to the quarter's end, holders of $12,000 face value subordinated
debentures converted their bonds into 999 shares of the Company's common stock
($12 per share conversion price).
10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - LIQUIDITY
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. At July 31, 2003,
the Company has a deficiency in equity of $52,923,000 compared to $50,921,000 as
of October 31, 2002, and a working capital deficiency of $56,875,000 as of July
31, 2003 compared to a deficiency of $44,668,000 as of October 31, 2002. The
increase in the working capital deficiency was primarily due to the increased
cash collections and the related reduction in accounts receivable and unbilled
receivables of approximately $4,184,000, increased lines of credit borrowings of
$4,350,000 and the reclassification of deferred income taxes of $2,100,000 as
long term assets. Over the past several years, management has been addressing
the issues that have lead to these deficiencies, and the results of management's
plans and efforts have been positive in two of the last three years. However,
the results of the last twelve months show that continued effort is necessary in
the future to allow the Company to operate profitably. Such actions and plans
include:
a) Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In December 2002, the
Company opened a new center in Rancho Bernardo. The Company has
no current plans to open any new facilities in the near future.
b) Increase revenue by expanding existing facilities or opening new
locations close to existing sites. In order to obtain certain new
large contracts, the Company has opened nearby x-ray or satellite
offices to meet the increase in patient volume for a certain
region. In January 2002, the Company opened two x-ray offices
near its Temecula facility which allowed the Company to obtain a
new capitation contract for approximately 62,000 lives. In
addition, to meet demand and generate economies of scale, the
Company has consolidated its mammography and ultrasound services
at a few of its largest facilities into separate womens' centers.
In September 2002, the Company opened a women's center adjacent
to its Orange Imaging facility.
c) Increase net revenue and decrease operating losses by eliminating
poor performing capitation and managed care contracts where
reimbursements fall short of the Company's costs. The Company
will renegotiate several of its existing capitation contracts
with the goal of increasing net reimbursement for the current
fiscal year. Effective May 1, 2003, the Company received an
increase in its capitation reimbursement from Oasis Medical Group
averaging approximately $45,000 per month which benefited the
Company's Desert Advanced facilities (Palm Springs and Palm
Desert).
11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - LIQUIDITY--CONTINUED
d) Continue to evaluate all facilities' operations and trim excess
operating and general and administrative costs where it is
feasible to do so including consolidating underperforming
facilities to reduce operating cost duplication and improve
operating income. During the nine months ended July 31, 2003, the
Company closed its La Habra facility and two of its satellite
x-ray facilities servicing its Riverside and Long Beach (Los
Coyotes) locations, respectively. The closures were cost
reduction measures where volume at these locations could be
directed to other nearby facilities with existing equipment
operating below capacity. By year-end, the Company plans to close
two additional satellite locations for similar reasons. The
Company anticipates there will be no losses associated with these
closings and the equipment will be moved to other existing sites.
e) Continue to selectively acquire new medical equipment and replace
old and obsolete equipment in order to increase service volume
and throughput at many facilities. Upgrades and new equipment
would be acquired only when anticipated increases in patient
volume support the increased debt service.
f) Depending on price, market circumstances and strategic buyers,
the Company may look to sell non core assets. Effective March 31,
2003, the Company sold its 50% share of Westchester Imaging Group
for $2,500,000. As part of the transaction, the Company purchased
100% of the accounts receivable generated through March 31, 2003
for $850,000 and reimbursed the joint venture for $283,000, which
represented 50% of the remaining liabilities, resulting in net
proceeds of approximately $1,367,000. The Company recognized a
gain on the transaction of approximately $2,952,000.
g) Continue to work with lessors and lenders to extend terms of
leases and financing to accommodate cash flow requirements for
ongoing agreements and upon the expiration of leases and notes.
In May 2003, the Company restructured sixteen of its existing
notes payable with DVI Financial Services, Inc. reducing its
monthly payments by approximately $210,000 per month for the next
nine months. In the tenth month, the month payments increase to
approximately $350,000 per month, an increase of $16,000 per
month over historical payment levels. The short-term cash flow
savings are approximately $1,845,000. The revised notes bear
interest at approximately 8.5% to 10.5% and have terms from 45 to
71 months with six notes payable having balloon payments.
Beginning in April 2003, the Company began receiving short-term
working capital loans from GE Healthcare Financial Services for
$200,000 per month for nine months, or $1,800,000. Subsequent to
the quarter's end, the Company will still receive five
installments totaling $1,000,000. The notes will accrue interest
only until the final installment with the first payment for all
nine notes to be made in January 2004. The five-year notes
payable bear interest at 9.00%.
12
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - LIQUIDITY--CONTINUED
On February 10, 2003, the Company was advised that the Federal
Deposit Insurance Corporation ("FDIC") had elected to close Coast
Business Credit ("Coast") and liquidate its accounts. As part of
that process, the FDIC advised the Company that until its account
was sold its credit line would be reduced to $15.5 million.
During the second quarter of fiscal 2003, the FDIC sold the
accounts receivable portfolio to GF Asset Management, Inc., a
division of GE, and reduced its credit line availability to
$14,500,000. As a result of the Company's relationship with GE,
both companies are working on an arrangement to continue to
provide a revolving line of credit with the Company past the
December 31, 2003 termination possibly consolidating all of the
Company's receivables into one line of credit
In May 2003, the Company sent out a solicitation requesting
current subordinated debenture holders to extend its term from
June 2003 to June 2008. In consideration for the deferral, the
Company will increase the interest from 10% to 11.5% (per annum)
paid quarterly beginning with the October 1, 2003 payment. In
addition, the Company will reduce the conversion rate from $12.00
to $2.50 per share for those consenting bondholders. The Company
also agreed not to redeem the bonds prior to June 2005. Of the
$16.3 million of outstanding debentures, the Company received
consents from holders of more than $11 million to the terms. The
Company determined that the residual $5.3 million of outstanding
debentures would be too costly to pay and would negatively impact
its future viability. Accordingly, the Company elected to again
seek consents from the holders the same restructuring already
approved by over $11 million with the intent to file that
approval with the Bankruptcy Court and seek confirmation of a
plan requiring all debentures, not just those consenting, to be
restructured in accordance with the consent. Having received an
approximate 94% in number and 96% in amount approval to the
extension program, the Company has submitted the restructuring
for approval and confirmation by the Bankruptcy Court. The
bankruptcy filing should have absolutely no other impact on the
Company other than restructuring of the debentures and should be
concluded before October 31, 2003. At that time, the outstanding
bond debenture balance of $16 million will be reclassified to
long-term liabilities thereby improving the Company's working
capital.
The Company operates in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations, particularly the
initial start-up and development expense of new diagnostic imaging centers and
the acquisition of additional centers and new diagnostic imaging equipment. To
the extent the Company is unable to generate sufficient cash from operations, or
the Company is unable to structure or obtain operating leases, it may be unable
to meet its capital expenditure requirements. Furthermore, the Company may not
be able to raise any necessary additional funds through bank financing or the
issuance of equity or debt securities on terms acceptable to it, if at all.
13
ITEM 2:
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Primedex Health Systems, Inc., incorporated on October 21, 1985, provides
diagnostic imaging services through its 55 facilities. The Company arranges for
the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound,
mammography, nuclear medicine and general diagnostic radiology to the public.
The consolidated financial statements include the accounts of Primedex Health
Systems, Inc., and its subsidiaries outlined as follows:
a) Radnet Management, Inc. ["Radnet"]
Subsidiaries
(a) Radnet Sub, Inc. ["Tower"],
(b) Radnet Heartcheck Management, Inc.,
(c) Radnet Managed Imaging Services, Inc. ["RMIS"],
(d) SoCal MR Site Management, Inc.,
(e) Radnet Management I, Inc.,
(f) Radnet Management II, Inc. ["Modesto"],
(g) Westchester Imaging Group (a 50% joint venture),
(h) Burbank Advanced Imaging Center, LLC (75%),
(i) Rancho Bernardo Advanced Imaging Center, LLC (75%)
b) Diagnostic Imaging Services, Inc. ["DIS"] Both Radnet and DIS are
combined with Beverly Radiology Medical Group III ["BRMG"]
Operating activities of subsidiary entities are included in the accompanying
financial statements from the date of acquisition. All intercompany transactions
and balances have been eliminated in consolidation and combinations. Due to low
volume, Radnet Heartcheck Management, Inc. ceased doing business in early fiscal
2003. Westchester Imaging Group ("WIG") was consolidated with the Company based
upon the criteria of EITF 97-2 insofar as the Company had a controlling
financial interest in WIG through a contractual management arrangement. The
Company's share of Westchester Imaging Group was sold on March 31, 2003.
Medical services and supervision at most of the Company's imaging centers are
provided through BRMG and through other independent physicians and physician
groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly
Radiology Medical Group, both of which are 99% owned by a shareholder and
president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT
The administrative provisions of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") direct the federal government to adopt
national electronic standards for automated transfer of certain health care data
between health care payors, plans and providers. HIPAA is designed to enable the
entire health care industry to communicate electronic data using a single set of
standards, thus eliminating all nonstandard formats currently in use. The
Company's contracted radiology practices and diagnostic imaging centers are
"covered entities" under HIPAA, and as such, must comply with the HIPAA
electronic data interchange mandates. The Company is required to be compliant by
October 16, 2003. The Company is in the process of determining the readiness
status of its software vendors, payors and claim clearinghouses to assess
exposure with regard to this legislation. The Company is at risk for both its
own HIPAA compliance and the compliance of those with whom it does business,
particularly third party payors. There can be no assurance that HIPAA compliance
issues will not have an adverse effect on the Company's business, results of
operations or financial condition.
14
FORWARD-LOOKING STATEMENTS
Throughout this report the Company makes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements include words such as "may," "will," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and other similar words and include all discussions about the Company's
acquisition and development plans. The Company does not guarantee that the
transactions and events described in this report will happen as described or
that any positive trends noted in this report will continue. The forward-looking
statements contained in this report are generally located in the material set
forth under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations," but may be found in other locations as
well. These forward-looking statements generally relate to Company plans,
objectives and expectations for future operations and are based upon
management's reasonable estimates of future results or trends. Although the
Company believes that its plans and objectives reflected in or suggested by such
forward-looking statements are reasonable, the Company may not achieve such
plans or objectives. You should read this report completely and with the
understanding that actual future results may be materially different from what
the Company expects. The Company will not update forward-looking statements even
though the situation may change in the future.
Specific factors that might cause actual results to differ from the Company's
expectation include, but are not limited to:
- economic, competitive demographic, business and other conditions
in the Company's markets;
- a decline in patient referrals;
- change in the rates or methods of third-party reimbursement for
diagnostic imaging services;
- the termination of contracts with third party payers;
- the availability of additional capital to fund capital
expenditure requirements;
- burdensome lawsuits against contracted radiology practices and
the Company;
- reduced operating margins due to managed care contracts and
capitated fee arrangements;
- any failure on the Company's part to comply with state and
federal anti-kickback and anti-self-referral laws or any other
applicable healthcare regulations;
- the Company's substantial indebtedness, debt service requirements
and liquidity constraints;
- risks related to convertible subordinated debentures and
healthcare securities generally;
- unforeseen technological changes; and
- other factors discussed elsewhere in this report.
15
All future written and verbal forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 2003 AND 2002
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENT OF NET REVENUE PERCENTAGE DOLLAR
NINE MONTHS ENDED JULY 31, INCREASE (DECREASE)
--------------------------------------- ---------------------
2003 2002 `02 TO `03
------------------- ------------------- ---------------------
Revenue 290.1% 269.6 % 14.2%
Less: Allowances (190.1) (169.6) 19.0
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 6.1
Operating expense
Operating expenses (73.6) (75.5) 3.5
Depreciation and amortization (11.8) (11.0) 14.1
Provision for bad debts (5.7) (4.8) 25.9
Gain (loss) on sale of centers
and equipment 2.7 (0.3) (1084.0)
------------------- ------------------- ---------------------
Total operating expense (88.4) (91.6) 2.5
------------------- ------------------- ---------------------
Income from operations 11.6 8.4 45.7
Interest expense, net (12.6) (11.9) 12.5
Other (expense) income, net (0.6) 0.4 (272.1)
------------------- ------------------- ---------------------
(Loss) Income before minority
interest (1.6) (3.1) (42.3)
Minority interest (0.3) (0.2) 29.7
------------------- ------------------- ---------------------
Net income (loss) (1.9) (3.3) (37.5)
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the nine months ended July
31, 2003 compared to the nine months ended July 31, 2002. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this quarterly report.
2003 2002
---- ----
NET REVENUE $107,971,000 $ 101,743,000
- -----------
Revenue of the contracted radiology practices and diagnostic imaging centers is
recorded when services are rendered based upon established charges and reduced
by contractual allowances. The Company utilizes historical collection experience
in estimating contractual allowances. The factors influencing the historical
collection experience include the contracted radiology practices' and diagnostic
imaging centers' patient or insurance mix, impact of managed care contract
pricing and contract revenue and the aging of the patient accounts receivable
balances. As these factors change, the historical collection experience is
revised accordingly in the period known. Net revenue as a percentage of gross
revenue may change from period to period for a variety of reasons including
changes in reimbursement and changes in fee schedules. As the Company
consolidates its billing into one internal system, a universal gross fee
schedule is being utilized which may differ from previous gross charge amounts
from 5% to 30%. In those cases, the individual facility's collection percentage
would decrease to accurately reflect the period's net revenue. The Company
anticipates all facilities will be converted to its internal billing and
collection system by fiscal year-end with the exception of its three Tower
locations.
16
Net revenue increased approximately $6,228,000, or 6.1%, for the nine months
ended July 31, 2003, compared to the same period last year. Of the net revenue
increase, $6,212,000 was due to the addition of four new sites subsequent to
November 1, 2001 (Burbank, Tarzana Advanced, Grove Diagnostic and Rancho
Bernardo). In addition, improvements made at the Company's Orange facility
increased net revenue by approximately $2,129,000 during the nine months ended
July 31, 2003 versus the same period the prior year. This increase was offset by
the sale of Westchester in March 2003 which decreased the Company's net revenue
by approximately $1,537,000 during the nine months ended July 31, 2003 versus
the same period the prior year.
OPERATING EXPENSES 2003 2002
- ------------------ ---- ----
OPERATING EXPENSES $ 79,500,000 $ 76,782,000
DEPRECIATION AND AMORTIZATION 12,765,000 11,191,000
PROVISION FOR BAD DEBTS 6,152,000 4,885,000
(GAIN) LOSS ON SALE OF INTEREST IN CENTER
OR EQUIPMENT (2,952,000) 300,000
--------------------------------
TOTAL OPERATING EXPENSES $ 95,465,000 $ 93,158,000
Operating expenses for the nine months ended July 31, 2003 increased
approximately $2,718,000, or 3.5%, compared to the same period last year. The
increase was primarily due to a 6.1% increase in net revenue and the variable
nature of many of the expense line items including, but not limited to, medical
supplies, billing fees, percentage of revenue agreements relating to physician
reading fees and the GE repair and maintenance agreement which increased
contracted fees from 3.64% to 3.74% of net revenue effective November 1, 2002.
Operating expenses did not increase in proportion to net revenue primarily due
to the solidification of physician staffing and elimination of the majority of
locum tenens issues which impacted the Company dramatically in the third quarter
of fiscal 2002. In particular were improvements in the operating expenses of the
Company's Desert Advanced facilities which reduced expenditures by approximately
$590,000 during the nine months ended July 31, 2003 compared to the same period
last year.
Included in operating expenses for the nine months ended July 31, 2003 and 2002
is approximately $47,192,000 and $45,687,000, respectively, for salaries and
reading fees, approximately $7,111,000 and $6,439,000, respectively, for
building and equipment rentals, and approximately $25,197,000 and $24,656,000,
respectively, in general and administrative expenditures. The Company's general
and administrative expenses include billing fees, medical supplies, office
supplies, repairs and maintenance, insurance, business tax and license, outside
services, utilities and other expenses including marketing, auto expenses and
travel.
During the last quarters of fiscal 2002, the Company experienced significant
insurance rate increases upon policy renewals. From July to October 2002,
general liability rates increased 50%, workers compensation insurance rates
increased 45% and malpractice rates increased 80%. For the nine months ended
July 31, 2003, the Company's costs for insurance increased 40%, or $1,114,000,
compared to the same period last year.
Depreciation and amortization for the nine months ended July 31, 2003 increased
approximately $1,574,000, or 14.1%, compared to the same period last year. The
increase is due to the addition of new sites and the upgrade or addition of
equipment throughout fiscal 2002 and early fiscal 2003. As of July 31, 2003,
gross property and equipment was approximately $140 million compared to
approximately $129 million as of July 31, 2002. The increase in equipment
resulted in increased business property taxes of approximately $346,000, or 33%,
for the nine months ended July 31, 2003 as compared to the same period in the
prior year.
17
Provision for bad debt for the nine months ended July 31, 2003 increased
approximately $1,267,000, or 25.9%, compared to the same period last year.
Coupled with the increase in net revenue, the Company's overall bad debt
percentage increased from approximately 1.4% of gross revenue to approximately
1.9% during fiscal 2002. The Company's historical percentage was primarily
affected by the write-off of one individual contract during fiscal 2002.
Gain on sale of centers and equipment for the nine months ended July 31, 2003
increased $3,252,000, or 1084.0%, compared to the same period last year. The
increase is primarily due to the sale of the Company's interest in a center.
During the nine months ended July 31, 2003, the Company sold its 50% share of
Westchester Imaging Group for $2,500,000. As part of the transaction, the
Company purchased 100% of the accounts receivable generated through March 31,
2003 for $850,000 and reimbursed the joint venture for 50% of the remaining
liabilities, approximately $283,000, resulting in net proceeds of approximately
$1,367,000. The Company recognized a gain on the transaction of approximately
$2,952,000.
2003 2002
---- ----
INTEREST EXPENSE, NET $ 13,644,000 $ 12,126,000
- ---------------------
Net interest expense for the nine months ended July 31, 2003 increased
approximately $1,518,000, or 12.5%, compared to the same period last year. The
increase is primarily a result of acquisitions coupled with new equipment
financing offset by decreases in line of credit interest charges with the
reductions in the prime interest rate during the respective periods.
2003 2002
---- ----
OTHER (EXPENSE) INCOME, NET $(678,000) $ 394,000
- ---------------------------
Other income, net of other expense, for the nine months ended July 31, 2003
decreased approximately $1,072,000, or 272.1%, compared to the same period last
year. Other income consists of professional reading income, record copy income,
deferred income on the sale and leaseback of the Company's Orange facility and
other miscellaneous receipts. Other expenses consist primarily of modification
fee amortization and other miscellaneous expenses or write-offs. During the nine
months ended July 31, 2003, the Company incurred a one-time charge for the
write-off of approximately $218,000 in other current assets relating to its
Tower Heartcheck operation and expensed approximately $780,000 for actual and
anticipated expenditures relating to pending litigation involving covenants not
to compete. These expenses were offset by other income including professional
reading, record copy and deferred revenue. In addition to other income, during
the nine months ended July 31, 2002, the Company received approximately $80,000
in general insurance refund checks for losses sustained at its Northridge and
Tustin facilities, and received approximately $90,000 for an insurance
reimbursement for a business interruption loss at its Roxsan facility when its
MRI sustained water damage and was out of service for approximately six weeks.
2003 2002
---- ----
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 288,000) ($ 222,000)
- -------------------------------------------
Minority interest expense for the nine months ended July 31, 2003 increased
approximately $66,000, or 29.7%, compared to the same period last year. Minority
interest is primarily comprised of 25% of the earnings of Burbank Advanced
Imaging Center and Rancho Bernardo Advanced Imaging Center and 50% of the
earnings of Westchester Imaging Group. The Company's share in Westchester
Imaging Group was sold on March 31, 2003. Rancho Bernardo Advanced opened in
December 2002. During the nine months ended July 31, 2003 and 2002, minority
interest related to Westchester was approximately ($255,000) and ($328,000),
respectively.
18
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2003 AND 2002
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENT OF NET REVENUE PERCENTAGE DOLLAR
THREE MONTHS ENDED JULY 31, INCREASE (DECREASE)
--------------------------------------- ---------------------
2003 2002 `02 TO `03
------------------- ------------------- ---------------------
Revenue 298.5% 276.7 % 10.2%
Less: Allowances (198.5) (176.7) 14.8
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 2.1
Operating expense
Operating expenses (72.6) (82.5) (10.0)
Depreciation and amortization (11.6) (11.4) 3.6
Provision for bad debts (6.0) (6.6) (7.5)
(Gain) loss on sale of interest
in center or equipment 0.0 (0.6) (99.5)
------------------- ------------------- ---------------------
Total operating expense (90.2) (101.1) (8.9)
------------------- ------------------- ---------------------
Income from operations 9.8 (1.1) 983.6
Interest expense, net (12.3) (12.2) 2.9
Other, net 0.3 (0.7) 148.9
------------------- ------------------- ---------------------
Income before minority interest (2.2) (14.0) 83.9
Minority interest (0.0) (0.4) 93.8
------------------- ------------------- ---------------------
Net income (2.2) (14.4) 84.2
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the three months ended July
31, 2003 compared to the three months ended July 31, 2002. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this quarterly report.
2003 2002
---- ----
NET REVENUE $36,341,000 $ 35,580,000
- -----------
Net revenue increased approximately $761,000, or 2.1%, for the three months
ended July 31, 2003, compared to the same period last year. Of the net revenue
increase, $1,355,000 was due to the addition of four new sites subsequent to
November 1, 2001 (Burbank, Tarzana Advanced, Grove Diagnostic and Rancho
Bernardo). In addition, improvements made at the Company's Orange facility
increased net revenue by approximately $755,000 during the three months ended
July 31, 2003 versus the same period the prior year. This increase was offset by
the sale of Westchester in March 2003 which decreased the Company's net revenue
by approximately $1,405,000 during the three months ended July 31, 2003 versus
the same period the prior year.
19
OPERATING EXPENSES 2003 2002
- ------------------ ---- ----
OPERATING EXPENSES $26,411,000 $29,361,000
DEPRECIATION AND AMORTIZATION 4,214,000 4,066,000
PROVISION FOR BAD DEBTS 2,163,000 2,338,000
(GAIN) LOSS ON SALE OF INTEREST IN CENTER
OR EQUIPMENT 1,000 217,000
-----------------------------
TOTAL OPERATING EXPENSES $32,789,000 $35,982,000
Operating expenses for the three months ended July 31, 2003 decreased
approximately $2,950,000, or 10.0%, compared to the same period last year. The
majority of this decrease was due to the solidification of the Company's
physician staff and the elimination of locum tenens which impacted the Company
dramatically during the latter half of fiscal 2002. During the three months
ended July 31, 2003, the Company reduced its expenditures for salaries and
physician reading fees by approximately $1,800,000 compared to the same period
the prior year. In addition, the Company received further discounts on its
overall medical supply purchases while maximizing purchase volume rebates on its
film and other medical supplies. During the three months ended July 31, 2003,
the Company reduced its expenditures for medical supplies by approximately
$1,391,000 compared to the same period the prior year. During the three months
ended July 31, 2002, the Company did not meet medical supply purchase volume
levels to qualify for discounts and rebates.
Included in operating expenses for the three months ended July 31, 2003 and 2002
is approximately $15,184,000 and $16,984,000, respectively, for salaries and
reading fees, approximately $2,302,000 and $2,255,000, respectively, for
building and equipment rentals, and approximately $8,925,000 and $10,122,000,
respectively, in general and administrative expenditures. The Company's general
and administrative expenses include billing fees, medical supplies, office
supplies, repairs and maintenance, insurance, business tax and license, outside
services, utilities and other expenses including marketing, auto expenses and
travel.
During the last quarters of fiscal 2002, the Company experienced significant
insurance rate increases upon policy renewals. From July to October 2002,
general liability rates increased 50%, workers compensation insurance rates
increased 45% and malpractice rates increased 80%. For the three months ended
July 31, 2003, the Company's costs for insurance increased 23%, or $232,000,
compared to the same period last year.
Depreciation and amortization for the three months ended July 31, 2003 increased
approximately $148,000, or 3.6%, compared to the same period last year. The
increase is due to the addition of new sites and the upgrade or addition of
equipment throughout fiscal 2002 and early fiscal 2003.
Provision for bad debt for the three months ended July 31, 2003 decreased
approximately $175,000, or 7.5%, compared to the same period last year. During
the third quarter of fiscal 2002, the Company's bad debt percentage was affected
by the write-off of approximately $850,000 in net accounts receivable due
primarily to one contract's dissolution and default on amount due.
Loss on sale of equipment for the three months ended July 31, 2003 decreased
$216,000, or 99.5%, compared to the same period last year. During the three
months ended July 31, 2002, the Company disposed of an MRI at Vacaville and an
x-ray system at its Redondo facility with the replacement of obsolete medical
equipment.
2003 2002
---- ----
INTEREST EXPENSE, NET $ 4,466,000 $ 4,341,000
- ---------------------
Net interest expense for the three months ended July 31, 2003 increased
approximately $125,000, or 2.9%, compared to the same period last year. The
increase is primarily a result of acquisitions coupled with new equipment
financing offset by decreases in line of credit interest charges with the
reductions in the prime interest rate during the respective periods.
20
2003 2002
---- ----
OTHER (EXPENSE) INCOME, NET $ 114,000 $ (233,000)
- ---------------------------
Other income, net of other expense, for the three months ended July 31, 2003
increased approximately $347,000, or 148.9%, compared to the same period last
year. Other income consists of professional reading income, record copy income,
deferred income on the sale and leaseback of the Company's Orange facility and
other miscellaneous receipts. Other expenses consist primarily of modification
fee amortization and other miscellaneous expenses or write-offs. During the
three months ended July 31, 2002, the Company expensed $60K for the forgiveness
of a note receivable, $60K for business insurance reimbursements which were less
than anticipated, $60K in other current assets deemed uncollectible, $55K for
penalties and $10K for a loss on investment. No such write-offs were made during
the three months ended July 31, 2003.
2003 2002
---- ----
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 9,000) ($ 146,000)
- -------------------------------------------
Minority interest expense for the three months ended July 31, 2003 decreased
approximately $137,000, or 93.8%, compared to the same period last year.
Minority interest is primarily comprised of 25% of the earnings of Burbank
Advanced Imaging Center and Rancho Bernardo Advanced Imaging Center and 50% of
the earnings of Westchester Imaging Group. The Company's share in Westchester
Imaging Group was sold on March 31, 2003. Rancho Bernardo Advanced opened in
December 2002. During the three months ended July 31, 2003 and 2002, minority
interest related to Westchester was approximately ($-0-) and ($167,000),
respectively.
21
LIQUIDITY AND CAPITAL RESOURCES
Cash increased for the nine months ended July 31, 2003 by $22,000 and decreased
for the nine months ended July 31, 2002 by $10,000.
Cash used by investing activities for the nine months ended July 31, 2003 was
$1,126,000 compared to $4,596,000 for the nine months ended July 31, 2002. For
the nine months ended July 31, 2003 and 2002, the Company purchased property and
equipment for approximately $2,493,000 and $6,428,000, respectively, received
proceeds from the sale of imaging centers or property and equipment of
$1,367,000 and $1,700,000, respectively. During the nine months ended July 31,
2003, the Company sold its 50% share of Westchester Imaging Group for
$2,500,000. As part of the transaction, the Company purchased 100% of the
accounts receivable generated through March 31, 2003 for $850,000 and reimbursed
the joint venture for 50% of the remaining liabilities of approximately $283,000
resulting in net proceeds of approximately $1,367,000. The Company recognized a
gain on the transaction of approximately $2,952,000. During the nine months
ended July 31, 2002, the Company sold the land and building at its Northridge
facility for $1,700,000 and leased the existing facility for ten years with a
beginning base rent of $13,458 per month. The Company recognized a loss on the
sale of approximately $147,000. In addition, during the nine months ended July
31, 2002, the Company received payments from related parties of $132,000.
Cash used for financing activities for the nine months ended July 31, 2003 was
$14,183,000 compared to $5,035,000 for the same period in 2002. For the nine
months ended July 31, 2003 and 2002, the Company made principal payments on
capital leases and notes payable of approximately $19,275,000 and $14,504,000,
respectively, increased its cash disbursements in transit by $68,000 and
$238,000, respectively, received proceeds from the sale of common stock of
$28,000 and $4,000, respectively, purchased subordinated debentures of $3,000
and $9,000, respectively, received proceeds from borrowing under existing lines
of credit and refinancing arrangements of approximately $5,427,000 and
$9,572,000, respectively, paid loan fees of $14,000 and $15,000, respectively,
made payments to related parties of $114,000 and $171,000, respectively, and
made joint venture distributions of $300,000 and $275,000, respectively. In
addition, during the nine months ended July 31, 2002, the Company received joint
venture proceeds of $125,000 for its new center in Rancho Bernardo.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. At July 31, 2003,
the Company has a deficiency in equity of $52,923,000 compared to $50,921,000 as
of October 31, 2002, and a working capital deficiency of $56,875,000 as of July
31, 2003 compared to a deficiency of $44,668,000 as of October 31, 2002. The
increase in the working capital deficiency was primarily due to the increased
cash collections and the related reduction in accounts receivable and unbilled
receivables of approximately $4,184,000, increased lines of credit borrowings of
$4,350,000 and the reclassification of deferred income taxes of $2,100,000 as
long term assets. Over the past several years, management has been addressing
the issues that have lead to these deficiencies, and the results of management's
plans and efforts have been positive in two of the last three years. However,
the results of the last twelve months show that continued effort is necessary in
the future to allow the Company to operate profitably. Such actions and plans
include:
a) Increase revenue by selectively opening imaging centers in
areas currently not served by the Company. In December 2002,
the Company opened a new center in Rancho Bernardo. The
Company has no current plans to open any new facilities in
the near future.
b) Increase revenue by expanding existing facilities or opening
new locations close to existing sites. In order to obtain
certain new large contracts, the Company has opened nearby
x-ray or satellite offices to meet the increase in patient
volume for a certain region. In January 2002, the Company
22
opened two x-ray offices near its Temecula facility which
allowed the Company to obtain a new capitation contract for
approximately 62,000 lives. In addition, to meet demand and
generate economies of scale, the Company has consolidated
its mammography and ultrasound services at a few of its
largest facilities into separate womens' centers. In
September 2002, the Company opened a women's center adjacent
to its Orange Imaging facility.
c) Increase net revenue and decrease operating losses by
eliminating poor performing capitation and managed care
contracts where reimbursements fall short of the Company's
costs. The Company will renegotiate several of its existing
capitation contracts with the goal of increasing net
reimbursement for the current fiscal year. Effective May 1,
2003, the Company received an increase in its capitation
reimbursement from Oasis Medical Group averaging
approximately $45,000 per month which benefited the
Company's Desert Advanced facilities (Palm Springs and Palm
Desert).
d) Continue to evaluate all facilities' operations and trim
excess operating and general and administrative costs where
it is feasible to do so including consolidating
underperforming facilities to reduce operating cost
duplication and improve operating income. During the nine
months ended July 31, 2003, the Company closed its La Habra
facility and two of its satellite x-ray facilities servicing
its Riverside and Long Beach (Los Coyotes) locations,
respectively. The closures were cost reduction measures
where volume at these locations could be directed to other
nearby facilities with existing equipment operating below
capacity. By year-end, the Company plans to close two
additional satellite locations for similar reasons. The
Company anticipates there will be no losses associated with
these closings and the equipment will be moved to other
existing sites.
e) Continue to selectively acquire new medical equipment and
replace old and obsolete equipment in order to increase
service volume and throughput at many facilities. Upgrades
and new equipment would be acquired only when anticipated
increases in patient volume support the increased debt
service.
f) Depending on price, market circumstances and strategic
buyers, the Company may look to sell non core assets.
Effective March 31, 2003, the Company sold its 50% share of
Westchester Imaging Group for $2,500,000. As part of the
transaction, the Company purchased 100% of the accounts
receivable generated through March 31, 2003 for $850,000 and
reimbursed the joint venture for $283,000, which represented
50% of the remaining liabilities, resulting in net proceeds
of approximately $1,367,000. The Company recognized a gain
on the transaction of approximately $2,952,000.
g) Continue to work with lessors and lenders to extend terms of
leases and financing to accommodate cash flow requirements
for ongoing agreements and upon the expiration of leases and
notes. In May 2003, the Company restructured sixteen of its
existing notes payable with DVI Financial Services, Inc.
reducing its monthly payments by approximately $210,000 per
month for the next nine months. In the tenth month, the
month payments increase to approximately $350,000 per month,
an increase of $16,000 per month over historical payment
levels. The short-term cash flow savings are approximately
$1,845,000. The revised notes bear interest at approximately
8.5% to 10.5% and have terms from 45 to 71 months with six
notes payable having balloon payments.
23
Beginning in April 2003, the Company began receiving
short-term working capital loans from GE Healthcare
Financial Services for $200,000 per month for nine months,
or $1,800,000. Subsequent to the quarter's end, the Company
will still receive five installments totaling $1,000,000.
The notes will accrue interest only until the final
installment with the first payment for all nine notes to be
made in January 2004. The five-year notes payable bear
interest at 9.00%.
On February 10, 2003, the Company was advised that the
Federal Deposit Insurance Corporation ("FDIC") had elected
to close Coast Business Credit ("Coast") and liquidate its
accounts. As part of that process, the FDIC advised the
Company that until its account was sold its credit line
would be reduced to $15.5 million. During the second quarter
of fiscal 2003, the FDIC sold the accounts receivable
portfolio to GF Asset Management, Inc., a division of GE,
and reduced its credit line availability to $14,500,000. As
a result of the Company's relationship with GE, both
companies are working on an arrangement to continue to
provide a revolving line of credit with the Company past the
December 31, 2003 termination possibly consolidating all of
the Company's receivables into one line of credit.
In May 2003, the Company sent out a solicitation requesting
current subordinated debenture holders to extend its term
from June 2003 to June 2008. In consideration for the
deferral, the Company will increase the interest from 10% to
11.5% (per annum) paid quarterly beginning with the October
1, 2003 payment. In addition, the Company will reduce the
conversion rate from $12.00 to $2.50 per share for those
consenting bondholders. The Company also agreed not to
redeem the bonds prior to June 2005. Of the $16.3 million of
outstanding debentures, the Company received consents from
holders of more than $11 million to the terms. The Company
determined that the residual $5.3 million of outstanding
debentures would be too costly to pay and would negatively
impact its future viability. Accordingly, the Company
elected to again seek consents from the holders the same
restructuring already approved by over $11 million with the
intent to file that approval with the Bankruptcy Court and
seek confirmation of a plan requiring all debentures, not
just those consenting, to be restructured in accordance with
the consent. Having received an approximate 94% in number
and 96% in amount approval to the extension program, the
Company has submitted the restructuring for approval and
confirmation by the Bankruptcy Court. The bankruptcy filing
should have absolutely no other impact on the Company other
than restructuring of the debentures and should be concluded
before October 31, 2003. At that time, the outstanding bond
debenture balance of $16 million will be reclassified to
long-term liabilities thereby improving the Company's
working capital.
The Company operates in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations, particularly the
initial start-up and development expense of new diagnostic imaging centers and
the acquisition of additional centers and new diagnostic imaging equipment. To
the extent the Company is unable to generate sufficient cash from operations, or
the Company is unable to structure or obtain operating leases, it may be unable
to meet its capital expenditure requirements. Furthermore, the Company may not
be able to raise any necessary additional funds through bank financing or the
issuance of equity or debt securities on terms acceptable to it, if at all.
24
The Company's future obligations for existing notes payable, equipment under
capital lease, lines of credit, subordinated bond debentures and equipment and
building operating leases for the next five years and thereafter are as follows
(numbers in thousands):
08/01/03 08/01/04 08/01/05 08/01/06 08/01/07
to to to to to There-
07/31/04 07/31/05 07/31/06 07/31/07 07/31/08 after Total
-------- -------- -------- -------- -------- ----- -----
Notes payable $14,567 $15,511 $23,483 $10,912 $ 8,822 $ 2,917 $76,212
Interest $ 7,535 $ 5,932 $ 3,832 $ 2,034 $ 978 $ 101 $20,412
-------- -------- -------- -------- -------- -------- --------
Total $22,102 $21,443 $27,315 $12,946 $ 9,800 $ 3,018 $96,624
Capital leases $12,422 $13,187 $12,978 $10,322 $ 8,445 $ 4,612 $61,966
Interest $ 5,434 $ 4,189 $ 2,892 $ 1,755 $ 847 $ 217 $15,334
-------- -------- -------- -------- -------- -------- --------
Total $17,856 $17,376 $15,870 $12,077 $ 9,292 $ 4,829 $77,300
======== ======== ======== ======== ======== ======== ========
Lines of credit $14,549 $ -- $ -- $ -- $ -- $ -- $14,549
======== ======== ======== ======== ======== ======== ========
Bond debentures $16,215 $ -- $ -- $ -- $ -- $ -- $16,215
======== ======== ======== ======== ======== ======== ========
Operating Leases:
Building $ 7,328 $ 6,351 $ 6,035 $ 5,251 $ 4,062 $16,218 $45,245
Equipment $ 2,280 $ 1,930 $ 1,459 $ 837 $ 203 $ -- $ 6,709
-------- -------- -------- -------- -------- -------- --------
Total $ 9,608 $ 8,281 $ 7,494 $ 6,088 $ 4,265 $16,218 $51,954
======== ======== ======== ======== ======== ======== ========
The Company's line of credits with GF Asset Management, a division of GE, and
DVI Business Credit are classified as a current liabilities primarily because
they are collateralized by account receivable and the eligible borrowing bases
are also classified as current assets. On February 10, 2003, the Company was
advised that the Federal Deposit Insurance Corporation ("FDIC") had elected to
close Coast Business Credit ("Coast") and liquidate its accounts. As part of
that process, the FDIC advised the Company that until its account was sold its
credit line would be reduced to $15.5 million. During the second quarter of
fiscal 2003, the FDIC sold the accounts receivable portfolio to GF Asset
Management, Inc. and reduced its credit line further to $14.5 million. As a
result of the Company's relationship with GE, both Companies are working on an
arrangement to continue to provide a revolving line of credit with the Company
past the December 31, 2003 termination possibly consolidating all of the
Company's receivables into one line of credit.
Effective March 1, 2000, the Company entered into an agreement with GE Medical
Systems for the maintenance of the majority of its medical equipment for a fee
based upon a percentage of net revenues with minimum aggregate net revenue
requirements. In August 2001, the agreement was amended and expires on October
31, 2005. The service fee ranges from 2.82% to 3.74% of net revenue (less
provisions for bad debt) and the aggregate minimum net revenue ranges from
$85,000,000 to $125,000,000 during the term of the agreement. For the nine
months ended July 31, 2003, the monthly service fees were 3.74% of net revenue.
On August 31, 2001, the Company entered into a sale-leaseback transaction in
which it sold its Orange Imaging facility for $2,250,000 and leased it back for
10 years. Rental commenced at $18,750 per month and increases by 3% per annum.
The Company has an option to repurchase the property at any time prior to August
31, 2006, at fair market value (but not less than $2,350,000 nor more than
$2,550,000). The gain on the transaction of approximately $449,000 was deferred
and is being recognized in equal monthly installments over the initial lease
period.
On March 18, 2002, the Company entered into a sale-leaseback transaction in
which it sold its Northridge Imaging facility for $1,700,000 and leased it back
for 10 years. Rental commenced at $13,458 per month and increases to $14,167 in
2003 to $14,167 in 2004 to $14,875 in 2005 to $15,583 in 2006 and thereafter
based upon a cost of living adjustment. The Company has an option to repurchase
the property from 2004 until 2007 at an exercise price commencing at $1,775,000
and increasing by $25,000 in the next year and an additional $50,000 in the
third year.
25
The Company's working capital needs currently are provided under two lines of
credit. Under one agreement with the GF Asset Management (previously Coast
Business Credit), due December 31, 2003, the Company may borrow the lesser of
75% to 80% of eligible accounts receivable, the prior four months' cash
collections, or $14,500,000. In any scenario, the Company may borrow up to the
aggregate collection of receivables in the prior four months as long as the
collections in any one month do not decrease by more than 25% from the prior
month. Interest on outstanding borrowings is payable monthly at the greater of
8% or the bank's prime rate plus 2.5%, with a minimum interest paid each month
of $30,000. At July 31, 2003 approximately $10,684,000 was outstanding under
this line. The lender holds a first lien position on substantially all of
Radnet's assets. The president and C.E.O. of the Company has personally
guaranteed $10,000,000 of the line. The line is further secured by a $5,000,000
life insurance policy on the life of the president and C.E.O.
The second agreement is with DVI Business Credit. Under this arrangement, the
Company may borrow the lesser of 110% of eligible accounts receivable or
$5,000,000. Interest on the outstanding balance is payable monthly at the bank's
prime rate plus 1%. At July 31, 2003, approximately $3,865,000 was outstanding
on this line. This line of credit is on a month-to-month basis. This credit line
is collateralized by approximately 80% of the Tower division's eligible accounts
receivable. On August 25, 2003, DVI commenced a Chapter 11 proceeding in the
Bankruptcy Court in Delaware. DVI continues to provide funding under the
arrangement while in the bankruptcy proceeding. A second line of credit
agreement with DVI was never utilized and was subsequently rescinded by the
Company.
In May 2003, the Company sent out a solicitation requesting current subordinated
debenture holders to extend its term from June 2003 to June 2008. In
consideration for the deferral, the Company will increase the interest from 10%
to 11.5% (per annum) paid quarterly beginning with the October 1, 2003 payment.
In addition, the Company will reduce the conversion rate from $12.00 to $2.50
per share for those consenting bondholders. The Company also agreed not to
redeem the bonds prior to June 2005. Of the $16.3 million of outstanding
debentures, the Company received consents from holders of more than $11 million
to the terms. The Company determined that the residual $5.3 million of
outstanding debentures would be too costly to pay and would negatively impact
its future viability. Accordingly, the Company elected to again seek consents
from the holders the same restructuring already approved by over $11 million
with the intent to file that approval with the Bankruptcy Court and seek
confirmation of a plan requiring all debentures, not just those consenting, to
be restructured in accordance with the consent. Having received an approximate
94% in number and 96% in amount approval to the extension program, the Company
has submitted the restructuring for approval and confirmation by the Bankruptcy
Court. The bankruptcy filing should have absolutely no other impact on the
Company other than restructuring of the debentures and should be concluded
before October 31, 2003.
The Company operates in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations, particularly the
initial start-up and development expense of new diagnostic imaging centers and
the acquisition of additional centers and new diagnostic imaging equipment. To
the extent the Company is unable to generate sufficient cash from operations, or
the Company is unable to structure or obtain operating leases, it may be unable
to meet its capital expenditure requirements. Furthermore, the Company may not
be able to raise any necessary additional funds through bank financing or the
issuance of equity or debt securities on terms acceptable to it, if at all.
26
ITEM 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company sells its services exclusively in the United States and receives
payment for its services exclusively in United States dollars. As a result, the
financial results are unlikely to be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
The majority of the Company's interest expense is not sensitive to changes in
the general level of interest in the United States because the majority of the
Company's indebtedness has interest rates which were fixed when the Company
entered into the note payable or capital lease obligation. None of the Company's
long-term liabilities have variable interest rates. Only the Company's lines of
credit, classified as current liabilities on the Company's financial statements,
is interest expense sensitive to changes in the general level of interest
because it is based upon the current prime rate plus a margin.
ITEM 4 - CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on
their evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Company's principal executive officer and
principal financial officer has concluded that the Company's disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act") are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses, and therefore
there were no corrective actions taken.
27
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
There are no matters to be reported under this heading.
ITEM 2. CHANGES IN SECURITIES
There are no matters to be reported under this heading.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no matters to be reported under this heading.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There
are no matters to be reported under this heading.
ITEM 5. OTHER INFORMATION
In May 2003, the Company sent out a solicitation requesting
subordinated debenture holders to extend its term from June
2003 to June 2008. In consideration for the deferral, the
Company will increase the interest from 10% to 11.5% (per
annum) paid quarterly beginning with the October 1, 2003
payment. In addition, the Company will reduce the conversion
rate from $12.00 to $2.50 per share for those consenting
bondholders. The Company also agreed not to redeem the bonds
prior to June 2005. Of the $16.3 million of outstanding
debentures, the Company received consents from holders of more
than $11 million to the terms. The Company determined that the
residual $5.3 million of outstanding debentures would be too
costly to pay and would negatively impact its future
viability. Accordingly, the Company elected to again seek
consents from the holders the same restructuring already
approved by over $11 million with the intent to file that
approval with the Bankruptcy Court and seek confirmation of a
plan requiring all debentures, not just those consenting, to
be restructured in accordance with the consent. Having
received an approximate 94% in number and 96% in amount
approval to the extension program, the Company has submitted
the restructuring for approval and confirmation by the
Bankruptcy Court. The bankruptcy filing should have absolutely
no other impact on the Company other than restructuring of the
debentures and should be concluded before October 31, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 11 - Computation of Earnings Per Share
b) On July 29, 2003, Registrant filed a Form 8-K Report
under Item 5 disclosing the information set forth under
Item 5 hereinabove.
28
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Primedex Health Systems, Inc.
(Registrant)
September 19, 2003 By: Howard G. Berger, M.D.
---------------------------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer
29
CERTIFICATION
I, Howard G. Berger, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Primedex Health
Systems, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: September 19, 2003
/S/ Howard G. Berger, M.D.
--------------------------
Howard G. Berger, M.D.
President and Principal Financial Officer
30